The yield on a one-year Treasury security is 5.3800%, and the two-year Treasury
ID: 2737418 • Letter: T
Question
The yield on a one-year Treasury security is 5.3800%, and the two-year Treasury security has a 7.2600% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? 7.8030% 10.4652% 11.6586% 9.1800% Recall that on a one-year Treasury security the yield is 5.3800% and 7.2600% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2500%. What is the market's estimate of the one-year Treasury rate one year from now? 8.6600% 7.3610% 9.8720% 10.9980% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? 5.46% 6.69% 6.45% 7.10%Explanation / Answer
1)
As per pure expecations theory
(1+one year spot rate)*(1+one year forward rate)=(1+2 year rate)^2
(1.0538)*(1+one year forward rate)=(1.0726)^2
one year forward rate=((1.0726)^2/(1.0538))-1
=9.18% rate one year from now
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